In the vast expanse of Texas oil fields, a critical but often overlooked challenge lies beneath the surface: produced water management. For every barrel of oil extracted in the Permian Basin, one report estimates that operators typically generate between 4-10 barrels of produced water—resulting in an estimated 3.9 billion barrels of produced water annually in Texas alone. This brackish mixture of formation water, injected fluids, and various compounds presents one of the industry's most persistent operational challenges.
While the industry continues to explore recycling technologies and beneficial reuse applications, economic and technical barriers have limited widespread adoption. Consequently, over 80% of Texas produced water still finds its way into saltwater disposal wells—a critical infrastructure network that enables continued production.
However, when injection operations impact nearby productive formations, the legal consequences can be substantial and the lawsuits complex. The tensions between production and the related disposal of produced water create complex liability questions that Texas courts continue to refine.
Case Study: When a Disposal Well Flooded a Producing Oil Well
A particularly instructive case study emerges in the recent decision of Basic Energy Services v. PPC Energy, where the El Paso Court of Appeals grappled with fundamental questions about disposal operator liability when productive wells are compromised. Basic Energy Services, LP v. PPC Energy LLP, No. 08-23-00218-CV, 2024 WL 5239902 (Tex. App.—El Paso Dec. 27, 2024, no pet. h.).
PPC Energy LLP operated nine oil wells in the Matthews Consolidated Field in Reeves County, Texas. Basic Energy Services, LP operated a commercial disposal well—the Orla Kessler No. 1—approximately 2,400 feet from PPC's property.
In 2019, PPC's wells began experiencing sudden, uncontrollable surges of wastewater, and by the end of the year, all of PPC's wells had ceased production due to the influx of wastewater and high pressure.
PPC sued Basic and three other nearby disposal well operators, alleging that their injection wells had drowned out PPC's producing oil wells. After PPC settled with the other operators, the case against Basic proceeded to a jury trial. The jury found Basic negligent as defined in the charge, which included a definition that "it is negligence to commit 'waste'" and instructing the jury that "waste" includes "the drowning with water a stratum or part of a stratum that is capable of producing oil or gas or both in paying quantities."
The jury determined that Basic's conduct proximately caused 60% of PPC's injuries, resulting in a substantial damage award. Basic filed this appeal.
Judicial Crossroads: The Court's Two-Part Analysis
Expanding Legal Reach: Waste Prohibition Applies to Commercial Disposal Wells
Section 85.321 of the Texas Natural Resources Code provides a cause of action for those injured by "waste":
A party who owns an interest in property or production that may be damaged by another party violating the provisions of this chapter ... or another law of this state prohibiting waste or a valid rule or order of the commission may sue for and recover damages and have any other relief to which he may be entitled at law or in equity.
In essence, 85.321 looks to other laws to define what is prohibited. In this case, PPC based its claim on Section 85.045 of the Natural Resources Code, which states that "[t]he production, storage, or transportation of oil and gas in a manner, in an amount, or under conditions that constitute waste is unlawful and is prohibited."
The primary issue was whether this prohibition applies to disposal well operators like Basic who do not directly "produce...oil or gas," but instead merely inject wastewater.
After examining the statutory language, context, legislative history, and relevant case law, the appellate court rejected Basic's interpretation. The court noted that "wastewater is inherent to the production process" and that "flooding out of producing strata is a long-recognized form of waste." The court observed that the Railroad Commission has specific jurisdiction over injection wells and that an interpretation exempting disposal well operators from the waste prohibition would create an "incongruous" result where "a company whose sole business is injecting wastewater into the strata of an oil and gas field [would] have more freedom in committing waste than an oil and gas operator that disposes of its own wastewater."
The court ultimately concluded that "the waste prohibition in § 85.045 as it pertains to production of oil and gas includes the handling of wastewater or produced water from oil and gas production" and thus applies to Basic.
Basic's (possible) Safety Net: Reasonably Prudent Operator Defense
Although the court held against Basic in reasoning that §85.045 applied to Basic's disposal operation, the court sided with Basic in determined that the trial court should have included an instruction on the reasonably prudent operator defense.
As the cost pointed out, Section 85.321 of the Natural Resources Code, which provides a cause of action for waste, also contains a defense that "it shall be a defense that the lease owner or operator was acting as a reasonably prudent operator would act under the same or similar facts and circumstances."
In the appellate court's view, the trial court erred in refusing to include an instruction on this defense, because the appellate court believed that Basic had presented more than a scintilla of evidence to support the instruction. Among other things, the appellate court pointed to evidence in the record that:
- Basic had exercised care in selecting the site for its disposal well, hiring a geologist to perform a location study;
- Basic complied with the Railroad Commission's permitting process, which would not issue a permit if it would endanger oil, gas, or geothermal resources;
- Basic operated its well within permitted parameters from 2014 through 2019 without complaints; and
- Expert testimony in the record established some standard of care for a reasonably prudent operator, and some evidence that Basic met that standard.
The court concluded that the omission of the reasonably prudent operator instruction was harmful error because it made Basic's negligence "a foregone conclusion" once Basic conceded that its well had flooded PPC's productive strata. Without the instruction, Basic "had no chance of prevailing on liability," even though it had presented evidence that could potentially satisfy the defense.
Rejection of Basic's Defense of Permit Compliance?
The court rejected Basic's argument that its compliance with its Railroad Commission permit should shield it from liability. The court noted that "permit-related requirements are not necessarily inconsistent with civil liability" and that "the mere fact that an administrative agency issues a permit to undertake an activity does not shield the permittee from third party tort liability stemming from consequences of the permitted activity."
Although compliance could not definitively shield Basic from liability as a matter of law, that compliance was not necessarily irrelevant. The court noted that evidence of compliance with Railroad Commission rules and procedures could serve as "some evidence of meeting the standard" of a reasonably prudent operator. On the other hand, as the court observed in discussing Miesch v. Exxon Corp., 180 S.W.3d 299, 323-24 (Tex. App.—Corpus Christi 2005), an operator's failure to comply with Railroad Commission requirements could be evidence that it did not act as a reasonably prudent operator.
On remand, Basic will presumably rely on the reasonably prudent operator defense, and its alleged compliance with its permit and/or other rules and regulations will presumably be part of that defense.
Potential Takeaways?
This decision could have significant implications for commercial disposal well operators. First, it clarifies that such operators are subject to the statutory prohibition against "waste" in the Natural Resources Code, even though they do not directly "produce...oil or gas." This exposes disposal well operators to potential liability if their operations flood and damage productive strata in a way that constitutes "waste."
Second, the decision confirms that disposal well operators may assert the reasonably prudent operator defense when faced with waste claims under Section 85.045. This defense can provide a potential shield against strict liability in certain circumstances, allowing operators to demonstrate they acted as a reasonably prudent operator would have acted under similar circumstances.
The handling of produced water is critically important in Texas, as oil and gas production generates substantial volumes of wastewater that must be properly managed. This decision highlights the legal risks and potential exposure that saltwater disposal operators face when their operations impact nearby productive wells. Oil and gas producers should also keep these legal constructs in mind when evaluating their own wastewater management strategies and when selecting disposal well contractors. The case serves as an important reminder that Texas courts view wastewater disposal as an integral component of the oil and gas production process, subject to the waste prevention provisions of the Natural Resources Code.
